The New Bull Market

[ducati916]

Some oil patch news:

The United States Oil Fund ETF (NYSEARCA: USO) reported its largest single-day inflow since April last week, even after the SEC recommended enforcement action against the fund.

- Valero (NYSE: VLO) said it would shut its Port Arthur refinery ahead of two tropical storms (and potential hurricanes) heading for Texas and Louisiana.

- The energy sector (XLE) led the S&P sector leaderboard on Monday, gaining 2.5 percent. Threats of supply curtailment from the Gulf storms pushed prices up.

Tuesday, August 25, 2020

Oil prices rose on Monday as more than 1.5 mb/d of U.S. offshore oil production was temporarily taken offline due to storms in the Gulf of Mexico. On Tuesday, prices inched up a bit further. But the impact cuts both ways – significant outages at Gulf Coast refineries could depress upstream prices in the Permian. However, either way, the effects are likely to be transitory.

More than half of Gulf Coast oil and gas production shut in. Ahead of two major storms, hundreds of offshore oil and gas platforms have been idled. As of midday on Monday, 281 platforms, or 43 percent, had suspended work. U.S. government data estimates that 82.4 percent of offshore oil production has been shut-in, and 56 percent of its gas production. Companies that have shut down production include Chevron (NYSE: CVX), Murphy Oil (NYSE: MUR), BHP (NYSE: BHP), BP (NYSE: BP) and Royal Dutch Shell (NYSE: RDS.A), among others.

More than 118,000 oil, gas and coal jobs lost. Since the start of the pandemic, more than 118,000 jobs in oil, natural gas, and coal production have been eliminated, according to a new report.

Arena Energy files for bankruptcy. Texas-based Arena Energy, which had operations in the Gulf of Mexico, filed for chapter 11 bankruptcy on Thursday, affecting $1 billion in debt.

Exxon limits output in Guyana due to gas issues. ExxonMobil (NYSE: XOM) said it is limiting output at its offshore oil project in Guyana to 100,000 bpd because of mechanical issues with gas compressing equipment, which prevents it from reinjecting gas produced. Instead of flaring, Exxon has decided to limit production.

Oil prices face bearish forces. Slow demand and some potential return of global oil supply could weigh on crude prices. The oil market has to reckon with the possibility of more oil returning to the market from Libya, Iran, and the United States. Calendar spreads have fallen into a stronger contango, with Brent five-week spreads falling to the lowest since early June.

SEB: Oil market tightening. While the market faces potential bearish winds, others see the upside. SEB chief commodities analysts Bjarne Schieldrop sees demand rising, U.S. oil production trending lower and OPEC+ staying the course. Brent has been stuck at $45 per barrel but could soon break free and “we think the direction then is up rather than down,” Schieldrop said.

ExxonMobil knocked out of Dow Jones. ExxonMobil (NYSE: XOM) was kicked out of the Dow Jones Industrial Average, making way for Salesforce.com, Amgen Inc. and Honeywell International. As recently as 2011, Exxon was the world’s largest company, but its swift fall is emblematic of the turmoil in the energy industry. “Those changes are a sign of the times - out with energy and in with cloud,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, according to Bloomberg. Exxon was worth $525 billion in 2007, and is now only worth about $180 billion.

IHS: Oil demand to plateau below pre-pandemic levels. “Global crude demand surged from May to July with the easing of some COVID-19 restrictions and now rests at 89% of prior-year levels--compared to being at 78% in April,” IHS wrote in a report. “IHS Markit expects demand growth to wane and plateau at 92-95 mbd (or roughly 92-95% of prior-year levels) through the first quarter of 2021.” The reason demand does not bounce back to pre-pandemic levels is because of reduced air travel.

More shale job losses. Pioneer Natural Resources (NYSE: PXD) and Parsley Energy (NYSE: PE) are planning to announce job cuts in the coming days, according to Reuters.

Natural gas prices shoot up. U.S. natural gas prices have climbed to their highest levels since late 2019, pushed higher by ongoing hot weather and absolute declines in production. The tightness is global – JKM prices for LNG could rise to $6/MMBtu by December, according to a report from Bank of America Merrill Lynch. That opens up exports for U.S. LNG again. “[T]he world will call on all US export capacity this winter, in our view,” the bank said.

Petrobras adds 26 oilfields to sale list. Brazil’s Petrobras (NYSE: PBR) has initiated the sale process for a group of 26 onshore and shallow water oilfields and a small nearby refinery in the northeastern part of the country, according to Reuters.

Peru oil and gas at risk. Indigenous protests have taken over Peru, threatening to undermine the Latin American nation’s burgeoning upstream industry. Peru has become a battlefield between economic interests and social rights.

Breadth is always an issue, but I would challenge this chart. Breadth is actually pretty good on a big picture look. If you look on any particular day, you fall to the fallacy of small numbers.

On the inflation risks: falling agricultural production (if it occurs) is a potential risk to rising agricultural prices.

Big Tech. Big price premium. Not saying it can't run further, just that jumping in now, if you missed the train at the station, is a risky proposition.

New IPOs are less in number but more mature and have (in some cases) actual earnings. These 2 facts (it is argued) differentiates 2020 from 2000.

jog on
duc

 

[ducati916]

With regard to market breadth:

With regard to advancing/declining: first look at 2017-2018. Contained in a range. Market went straight up. Market breadth and a rising market are fine as long as we sit most of the time in that wide band. Currently we are. Yes we are at the lower border, indicating that we have had a bit of a pullback in the broad market, which is correct. We are also moving back higher, greater (broader) participation.

Then we look at the volatility of the volume. It is declining, which means that the bears are losing strength on pullbacks (in the broader market) and that the market is consolidating in these pullbacks.

Last night's post demonstrated that the rotation has been occurring over the last 3 months +/-. Which is to say, the rotation from very narrow leadership of the mega-caps FAANMA, to a far broader participation is continuing.

One of the major catalysts that will drive that rotation is the upcoming election. The traditional sectors and parties have already been identified: that of course does not mean that that will hold true this time round.

jog on
duc

 

[ducati916]

Some 'underloved' mid-caps:

As a basket, could have potential. The 'E' is estimated, which means that there has been a positive catalyst identified moving forward. Now of course, whether that estimate plays out is quite another thing altogether.

jog on
duc

 

[over9k]

I know we think of the fangs when we say megatech, but netflix really shouldn't be in it.

The megatech has pasted etf's over the past 3 months just like it did the previous three.


This idea of a rotation is a bit odd, if anything we've seen an even greater divergence begin over the past fortnight or so:

And that's just the S&P, the nasdaq divergence is even greater, and FAAMG even greater again.

I do hear you about the massive price to book ratio:

But at the same time, in the .com bubble even the little guys (in tech) were soaring. This time around, the little guys are all going bust in basically every sector/industry, and the big players are picking their marketshare(s) and assets up for peanuts. This is, depressingly, the ideal market conditions for big players that can raise the capital necessary to ride the storm out. The bigger the player, the better it's doing.

Even the oil supermajors are getting absolutely hosed - by aramco.

Finally, just in case anyone's in any kind of doubt as to the absolute juggernauts the megatech are, check this out:

 

[ducati916]

And the gift that just keeps on giving:

So I sold a bunch of CALLS @ strike $2500 (with an IV of 120%) based purely on this upcoming stock split (5 for 1 split) which seems to have ignited a frenzy in the stock. Anyway, as long as TSLA stays below $2500 by Friday, I'm happy.

jog on
duc

 

[ducati916]

Bailout?

19,000 jobs have been mooted as the number. In an election year, that is a pretty compelling threat. Do you buy on the 'hope' that (a) there is a bailout and (b) that if there is a bailout that (c) the airlines actually respond as you want.

Seems a bit of a gamble to me.

Thoughts?

jog on
duc

 

[over9k]

The conspiracy theorist in me says that the democrats have engaged in a gambit - logjam stimulus to torpedo the economy in the hopes that trump gets the flak for it. Now that they've moved all their own money around to where it needs to be and don't need to approve the stimulus to rescue their own portfolio's, the whole thing can go to hell in a handbasket & they won't care.

I base this on nothing other than pure cynicism of politicians and knowing that nothing is beyond (or beneath) them.

 

[ducati916]

Another view of breadth:

We now have just under 60% of the S&P500 above their 200EMA. Assuming it continues, and it is only at the mean currently, to the 1STD, most sectors will advance.

jog on
duc

 

[Lucky777]

 

[aus_trader]

19,000 jobs have been mooted as the number. In an election year, that is a pretty compelling threat. Do you buy on the 'hope' that (a) there is a bailout and (b) that if there is a bailout that (c) the airlines actually respond as you want.

Seems a bit of a gamble to me.

Thoughts?

Does seem like a gamble at this point in time. I think the best of the Airline companies with good balance sheets may survive and prosper once the pandemic ends but by then the weakest and the most heavily indebted may have gone under by then...

Example 1: Of the two Aussie Airlines, it looks like Qantas (QAN) may be able to survive possibly with capital raisings or Govt assistance but Virgin (was VAH when it traded on the ASX) has gone under.

Example 2: In the case of NZ, I think Air New Zealand (AIZ) will survive and it's actually flying locally within the country and a few selected international routes at the moment, so I think a survival candidate indeed. Besides I really doubt if NZ Govt would deny any assistance if the national airline was struggling and was facing bankruptcy.

 

[over9k]

We're also heading into summer, a traditionally high travel/high activity time of year.

 

[ducati916]

Hodge podge of stuff:

Powell to make the Jackson Hole speech. Nothing dramatic expected.

TSLA adds $100+ in a day. Still below the rate needed to hit $2,500 by Friday, although it could be close.

Some virus news.

jog on
duc

 

[ducati916]

Now something altogether more serious:

Two VIX measures: (a) of SPY and (b) 10yr Note.

You will notice that both have slipped outside of their trend-lines. Not a good development. Yields have been rising recently, not much, basis pts, but rising nonetheless. It could be in anticipation of the Fed. It could be completely something else.

Either way, something is up and it MIGHT spell a bit of a correction in stocks.

Now this is not (in my opinion) a trend breaking correction, just a correction. For these types of correction (if it comes at all) I typically hedge with Options (which I have just done). So in the sectors that I hold ETFs in, I have hedged with PUTS.

jog on
duc

 

[ducati916]

Mostly Fed. based news today:

And with the fall-off in Bond purchases:

We have an accounting for why Bond prices are falling (yields rising). Now stocks can endure yields circa 5%-6%. However, compared to recent history with yields, that would be perceived (initially) very poorly, remember the Taper Tantrum of 2018-2019.

The other issue for the market is that 'insiders' are significant sellers of stock currently. I always watch this as a bit of a red flag for an individual stock. For the entire market? I'd err to the side of cautious.

Optimism has shifted from doom to euphoria:

We'll see if Financials continue their traditional outperformance into the election and post. With yields rising, that is certainly a tailwind for financials.

And finally TSLA:

So it has to stay under $2,500 by tomorrow for another payday.

jog on
duc

 

[ducati916]

The Fed’s widely expected announcement of a shift to so-called symmetric inflation targeting spurred a selloff in the long end of the Treasury curve, as the 30-year bond jumped 8 basis points to finish above 1.5% for the first time since June, while stocks finished marginally higher to extend the S&P 500’s winning streak to six. Gold reversed early gains and fell nearly 1% to $1,936 an ounce, while WTI crude remained near $43 a barrel. The VIX caught a bid for a second straight day, closing at a one-month high near 25.5.

Another week of consolidation as Reserve Bank credit (the sum total of interest bearing assets at the Fed) registered at $6.97 trillion, marking the ninth straight reading just below the $7 trillion mark. That brings the three-month annualized growth rate to 5.5%, and 83% on a year-over-year basis.

Risk appetite continues to percolate across credit markets, as the triple-C-rated cohort of the Bloomberg Barclays High Yield Index saw its option-adjusted spread narrow back inside 1,000 basis points yesterday, roughly half the pickup on offer in March.

That price improvement comes despite an historic proliferation of bankruptcies. Citing data from New Generation Research’s BankruptcyData.com unit, the Financial Times notes that through Aug. 11, a record 45 U.S. companies with assets of at least $1 billion have filed for Chapter 11, well above the 38 $1 billion-plus bankruptcies logged by this time in 2009 and a record figure for a full year.

“We are in the first innings of this bankruptcy cycle,” commented Ben Schlafman, chief operating officer at New Generation Research. “It will spread far across industries as we get deeper into the crisis. It’s going to be a bumpy ride.”

More broadly, a report yesterday from Moody’s projected the trailing 12-month speculative-grade default rate will reach a range of 10.9% and 14.5% by February of next year, challenging the post-1983 record of 13.3% set in September 2009. The rating agency’s B3 Negative and Lower list (equivalent to single-B-minus) stands at 26.9% of the speculative-grade population, down from a record 27.5% in May but still above the 2009-era peak of 26.1%. That growth is notable as the financially stretched companies within the B3N cohort traditionally default at more than three times the long-term average rate for junk bonds.

The spate of restructurings and distressed situations, in tandem with the broad erosion of debt covenants, has yielded an increase in acrimony among various creditor contingents as they fight for claims on finite corporate assets.

On June 8, mattress maker Serta Simmons Bedding, LLC announced a debt exchange with a lender group including asset managers Eaton Vance and Invesco, elevating the cohort to senior status over another group of lenders including private equity giants Apollo and Angelo Gordon in return for $200 million in fresh capital. On June 20 the New York State Supreme Court threw out a challenge from the suddenly-subordinated p.e. lenders, completing a role reversal as the Apollo and Angelo Gordon pair were outmaneuvered by the asset managers.

The thwarted private equity contingent had their own plans, which included shifting Serta Simmons’ intellectual property into a new subsidiary and out of reach of the rival creditor group. “They were threatening to absolutely screw us,” Eaton Vance portfolio manager Craig Russ told The Wall Street Journal on June 26.

Bankrupt Ascena Retail Group, Inc., which owns the Ann Taylor and Lane Bryant apparel brands, is another contentious dispute, this time pitting creditors against the company. Bloomberg reported on August 14 that a trio of investment funds have hired law firm King & Spalding to challenge the terms of a debtor-in-possession (DIP) loan which gives exclusive participation rights to lenders who approved the company’s new financing, leaving those who resisted the terms of the DIP out in the cold.

The saga of cosmetics concern Revlon stands as perhaps the most striking example, setting a creditor cohort against Citigroup, the bank acting as administrative agent. Earlier in August, Citi mistakenly wired some $900 million to a cadre of Revlon creditors, including hedge funds Brigade Capital, Symphony Asset Management and HPS Capital Partners.

While Citi claimed the incident was a simple administrative error, the trio refused to return the funds, accusing Citi of helping Revlon to use “manipulat[ive]” tactics to shift valuable collateral out of the creditors’ reach. The hedge funds allege that, lacking sufficient support for its plan from lenders, Revlon (with Citi’s help) borrowed additional funds via a revolving credit facility. In pursuing that transaction, the company brought investment bank Jefferies into the fold as a temporary creditor, tipping the voting scales in favour of the debt exchange and subordinating the hedge funds in the capital structure food chain.

Of course, the peculiar combination of economic distress and monetary abundance looms large in these disputes. An anonymity-seeking financing lawyer tells the FT today that the situation is unlikely to change anytime soon, “given what looks like a perpetuity of zero interest rates and infinite liquidity.”

jog on
duc

 

[ducati916]

So just ahead of the w/e:

Ominous looking candle.

VIX moving higher.

The inflation metric (particularly after the Fed) not yet signalling, but, getting very warm.

Confirming:

And Bond market volatility also moving higher.

The duc is ready having shorted Treasuries and hedged via Puts, any downdraft in the over-all market. Irrespective of whether the market sells off or not, I like the short Treasury position as I think (a) the Fed. does not go NIRP and (b) clearly no curve control currently, so (c) Treasuries could well decline ending one of the great bull markets of all time having stretched from August 1982.

For more income based investors, assuming that ZIRP is here for a while, using the Corporate Bond yield to identify safe stocks where the dividend yield should be safe:

jog on
duc

 

[ducati916]

Pretty quiet day heading into the w/e.

So VIX started to fall again. I took off my Put hedges, but my short Treasury trade remains.

TSLA pays me.

Yields on 20yr paper have moved 32 basis points since the most recent low. The inflation trade still has no signal, but it is hovering in that area. A break of the trend-line might not be enough: a break of support would also be required.

Bridgewater struggling: https://www.institutionalinvestor.c...-Having-a-Bad-Year-David-McCormick-Has-a-Plan

No summer blockbusters out of Hollywood. I lined up to watch both of these in the US (San Francisco).

jog on
duc

 

[ducati916]

Seasonality:

So the QQQ a little more volatile in Sept. than SPY, which usually waits until Oct.

Lots of complacency in the market currently.

And six lottery tickets that I am simply going to paper trade (except OCGN) and see how my initial scan code works out.

jog on
duc

 

[aus_trader]

Seasonality:

View attachment 108421 View attachment 108422

So the QQQ a little more volatile in Sept. than SPY, which usually waits until Oct.

View attachment 108420

Lots of complacency in the market currently.

View attachment 108419

And six lottery tickets that I am simply going to paper trade (except OCGN) and see how my initial scan code works out.

jog on
duc

duc, what was the reason for leaving out OCGN. I just like to understand how you think in terms of picking stock candidates.

 

[ducati916]

duc, what was the reason for leaving out OCGN. I just like to understand how you think in terms of picking stock candidates.

Possibly I didn't express that very clearly. I liked OCGN so much, I have placed an order to buy. It is a biotech, which means that it could move 100% in either direction.

The other 5 are just a bit of an experiment (somewhat inspired by the 'Festering' thread') and I'll see how they pan out.

Here are the other 5:

AMBO 'should' also do well (at least if the above chart has any value). In fact, looking at it again, I'll add an order for it as well.

jog on
duc